Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.

Saturday, March 22, 2014

Ed Steer's Gold and Silver Report - Data from not just Friday March 21 , 2014 but also data from the week that just ended ..... Important news , data and views touching on the precious metals ! Key highlights come from Koos Jansen ( China demand ) , Doug Noland ( Friday missive -- April / May / June Dynamic ) , Features on Asia demand - not just China but also India and South Korea , Ted Butler discusses efforts to sue both JP Morgan and Comex regarding gold price manipulations ..... Additional items to consider including the full Ted Butler Report in the " additional items " section ......

How much gold does the US Government have actually ? First the fables ....

http://en.wikipedia.org/wiki/United_States_Bullion_Depository

The United States Bullion Depository, often known as Fort Knox, is a fortified vault building located adjacent to Fort Knox, Kentucky, used to store a large portion of United States official gold reserves and occasionally other precious items belonging or entrusted to the federal government.

The United States Bullion Depository holds 4,578 metric tons (5,046.3 short tons) of gold bullion (147.2 million oz. troy). This is roughly 3 percent of all the gold ever refined throughout human history. Even so, the depository is second in the United States to the Federal Reserve Bank of New York's underground vault in Manhattan, which holds 7,000 metric tons (7,716 tons) of gold bullion (225.1 million oz. troy), some of it in trust for foreign nations, central banks and official international organizations.

Status Report of U.S. Treasury-Owned Gold

Current Report: February 28, 2014

Department of the TreasuryFinancial Management ServiceSTATUS REPORT OF U.S. TREASURY-OWNED GOLDFebruary 28, 2014

Summary

Fine Troy Ounces

Book Value

Gold Bullion

258,641,878.074

$10,920,429,098.79

Gold Coins, Blanks, Miscellaneous

2,857,048.173

120,630,859.37

Total

261,498,926.247

11,041,059,958.16

Mint-Held Gold - Deep Storage

Denver, CO

43,853,707.279

1,851,599,995.81

Fort Knox, KY

147,341,858.382

6,221,097,412.78

West Point, NY

54,067,331.379

2,282,841,677.17

Subtotal - Deep Storage Gold

245,262,897.040

10,355,539,085.76

Mint-Held Treasury Gold - Working Stock

All locations - Coins, blanks, miscellaneous

2,783,218.656

117,513,614.74

Subtotal - Working Stock Gold

2,783,218.656

117,513,614.74

Grand Total - Mint-Held Gold

248,046,115.696

10,473,052,700.50

Federal Reserve Bank-Held Gold

Gold Bullion:

Federal Reserve Banks - NY Vault

13,376,987.715

564,805,850.63

Federal Reserve Banks - display

1,993.319

84,162.40

Subtotal - Gold Bullion

13,378,981.034

564,890,013.03

Gold Coins:

Federal Reserve Banks - NY Vault

73,452.066

3,101,307.82

Federal Reserve Banks - display

377.451

15,936.81

Subtotal - Gold Coins

73,829.517

3,117.244.63

Total - Federal Reserve Bank-Held Gold

13,452,810.551

568,007,257.66

Total - Treasury-Owned Gold

261,498,926.247

$11,041,059,958.16

Deep Storage: Deep-Storage gold is the portion of the U.S. government-owned Gold Bullion Reserve that the U.S. Mint secures in sealed vaults, which are examined annually by the Department of Treasury's Office of the Inspector General. Deep-Storage gold comprises the vast majority of the Reserve and consists primarily of gold bars. This portion was formerly called "Bullion Reserve" or "Custodial Gold Bullion Reserve."

Working Stock: Working-Stock gold is the portion of the U.S. government-owned Gold Bullion Reserve that the U.S. Mint uses as the raw material for minting congressionally authorized coins. Working-Stock gold comprises only about 1 percent of the Reserve and consists of bars, blanks, unsold coins, and condemned coins. This portion was formerly listed as individual coins and blanks or called "PEF Gold."

Now , the Inconvenient truths..... there may not be any gold not just with the US , but also Germany , and just 30 tons with France ! Note that was as of 2012 - any recall gold turbulence in April / May / June timeframe of 2013 ? Think there is much if any gold left in these Central Banks presently ( apart from maybe reserves of Cyprus , perhaps Greece and now Ukraine )

Do Western Central Banks Have Any Gold

Left???

By: Eric Sprott & David Baker

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim. The gold bars are part of their respective foreign currency reserves, which include all the usual fiat currencies like the dollar, the pound, the yen and the euro.

Collectively, the governments/central banks of the United States, United Kingdom, Japan, Switzerland, Eurozone and the International Monetary Fund (IMF) are believed to hold an impressive 23,349 tonnes of gold in their respective reserves, representing more than $1.3 trillion at today’s gold price. Beyond the suggested tonnage, however, very little is actually known about the gold that makes up this massive stockpile. Western central banks disclose next to nothing about where it’s stored, in what form, or how much of the gold reserves are utilized for other purposes. We are assured that it’s all there, of course, but little effort has ever been made by the central banks to provide any details beyond the arbitrary references in their various financial reserve reports.

Twelve years ago, few would have cared what central banks did with their gold. Gold had suffered a twenty year bear cycle and didn’t engender much excitement at $255 per ounce. It made perfect sense for Western governments to lend out (or in the case of Canada – outright sell) their gold reserves in order to generate some interest income from their holdings. And that’s exactly what many central banks did from the late 1980’s through to the late 2000’s. The times have changed however, and today it absolutely does matter what they’re doing with their reserves, and where the reserves are actually held. Why? Because the countries in question are now all grossly over-indebted and printing their respective currencies with reckless abandon. It would be reassuring to know that they still have some of the ‘barbarous relic’ kicking around, collecting dust, just in case their experiment with collusive monetary accommodation doesn’t work out as planned.

You may be interested to know that central bank gold sales were actually the crux of the original investment thesis that first got us interested in the gold space back in 2000. We were introduced to it through the work of Frank Veneroso, who published an outstanding report on the gold market in 1998 aptly titled, “The 1998 Gold Book Annual”. In it, Mr. Veneroso inferred that central bank gold sales had artificially suppressed the full extent of gold demand to the tune of approximately 1,600 tonnes per year (in an approximately 4,000 tonne market of annual supply). Of the 35,000 tonnes that the central banks were officially stated to own at the time, Mr. Veneroso estimated that they were already down to 18,000 tonnes of actual physical. Once the central banks ran out of gold to sell, he surmised, the gold market would be poised for a powerful bull market… and he turned out to be completely right – although central banks did continue to be net sellers of gold for many years to come.

As the gold bull market developed throughout the 2000’s, central banks didn’t become net buyers of physical gold until 2009, which coincided with gold’s final break-out above US$1,000 per ounce. The entirety of this buying was performed by central banks in the non-Western world, however, by countries like Russia, Turkey, Kazakhstan, Ukraine and the Philippines… and they have continued buying gold ever since. According to Thomson Reuters GFMS, a precious metals research agency, non-Western central banks purchased 457 tonnes of gold in 2011, and are expected to purchase another 493 tonnes of gold this year as they expand their reserves.1 Our estimates suggest they will likely purchase even more than that.2 The Western central banks, meanwhile, have essentially remained silent on the topic of gold, and have not publicly disclosed any sales or purchases of gold at all over the past three years. Although there is a “Central Bank Gold Agreement” currently in place that covers the gold sales of the Eurosystem central banks, Sweden and Switzerland, there has been no mention of gold sales by the very entities that are purported to own the largest stockpiles of the precious metal.3 The silence is telling.

Over the past several years, we’ve collected data on physical demand for gold as it has developed over time. The consistent annual growth in demand for physical gold bullion has increasingly puzzled us with regard to supply. Global annual gold mine supply ex Russia and China (who do not export domestic production) is actually lower than it was in year 2000, and ever since the IMF announced the completion of its sale of 403 tonnes of gold in December 2010, there hasn’t been any large, publicly-disclosed seller of physical gold in the market for almost two years.4 Given the significant increase in physical demand that we’ve seen over the past decade, particularly from buyers in Asia, it suffices to say that we cannot identify where all the gold is coming from to supply it… but it has to be coming from somewhere.
To give you a sense of how much the demand for physical gold has increased over the past decade, we’ve listed a select number of physical gold buyers and calculated their net change in annual demand in tonnes from 2000 to 2012 (see Chart A).

As can be seen, the mere combination of only five separate sources of demand results in a 2,268 tonne net change in physical demand for gold over the past twelve years – meaning that there is roughly 2,268 tonnes of new annual demand today that didn’t exist 12 years ago. According to the CPM Group, one of the main purveyors of gold statistics, the total annual gold supply is estimated to be roughly 3,700 tonnes of gold this year. Of that, the World Gold Council estimates that only 2,687 tonnes are expected to come from actual mine production, while the rest is attributed to recycled scrap gold, mainly from old jewelry.5 (See footnote 5). The reporting agencies have a tendency to insist that total physical demand perfectly matches physical supply every year, and use the “Net Private Investment” as a plug to shore up the difference between the demand they attribute to industry, jewelry and ‘official transactions’ by central banks versus their annual supply estimate (which is relatively verifiable). Their “Net Private Investment” figures are implied, however, and do not measure the actual investment demand purchases that take place every year.

If more accurate data was ever incorporated into their market summary for demand, it would reveal a huge discrepancy, with the demand side vastly exceeding their estimation of annual supply. In fact, we know it would exceed it based purely on China’s Hong Kong gold imports, which are now up to 458 tonnes year-to-date as of July, representing a 367% increase over its purchases during the same period last year. If the imports continue at their current rate, China will reach 785 tonnes of gold imports by year-end. That’s 785 tonnes in a market that’s only expected to produce roughly 2,700 tonnes of mine supply, and that’s just one buyer.

Then there are all the private buyers whose purchases go unreported and unacknowledged, like that of Greenlight Capital, the hedge fund managed by David Einhorn, that is reported to have purchased $500 million worth of physical gold starting in 2009. Or the $1 billion of physical gold purchased by the University of Texas Investment Management Co. in April 2011… or the myriad of other private investors (like Saudi Sheiks, Russian billionaires, this writer, probably many of our readers, etc.) who have purchased physical gold for their accounts over the past decade. None of these private purchases are ever considered in the research agencies’ summaries for investment demand, and yet these are real purchases of physical gold, not ETF’s or gold ‘certificates’. They require real, physical gold bars to be delivered to the buyer. So once we acknowledge how big the discrepancy is between the actual true level of physical gold demand versus the annual “supply”, the obvious questions present themselves: who are the sellers delivering the gold to match the enormous increase in physical demand? What entities are releasing physical gold onto the market without reporting it? Where is all the gold coming from?
There is only one possible candidate: the Western central banks. It may very well be that a large portion of physical gold currently flowing to new buyers is actually coming from the Western central banks themselves. They are the only holders of physical gold who are capable of supplying gold in a quantity and manner that cannot be readily tracked. They are also the very entities whose actions have driven investors back into gold in the first place. Gold is, after all, a hedge against their collective irresponsibility – and they have showcased their capacity in that regard quite enthusiastically over the past decade, especially since 2008.

If the Western central banks are indeed leasing out their physical reserves, they would not actually have to disclose the specific amounts of gold that leave their respective vaults. According to a document on the European Central Bank’s (ECB) website regarding the statistical treatment of the Eurosystem’s International Reserves, current reporting guidelines do not require central banks to differentiate between gold owned outright versus gold lent out or swapped with another party. The document states that, “reversible transactions in gold do not have any effect on the level of monetary gold regardless of the type of transaction (i.e. gold swaps, repos, deposits or loans), in line with the recommendations contained in the IMF guidelines.”6 (Emphasis theirs). Under current reporting guidelines, therefore, central banks are permitted to continue carrying the entry of physical gold on their balance sheet even if they’ve swapped it or lent it out entirely. You can see this in the way Western central banks refer to their gold reserves. The UK Government, for example, refers to its gold allocation as, “Gold (incl. gold swapped or on loan)”. That’s the verbatim phrase they use in their official statement. Same goes for the US Treasury and the ECB, which report their gold holdings as “Gold (including gold deposits and, if appropriate, gold swapped)” and “Gold (including gold deposits and gold swapped)”, respectively (see Chart B). Unfortunately, that’s as far as their description goes, as each institution does not break down what percentage of their stated gold reserves are held in physical, versus what percentage has been loaned out or swapped for something else. The fact that they do not differentiate between the two is astounding, (Ed. As is the “including gold deposits” verbiage that they use – what else is “gold” supposed to refer to?) but at the same time not at all surprising. It would not lend much credence to central bank credibility if they admitted they were leasing their gold reserves to ‘bullion bank’ intermediaries who were then turning around and selling their gold to China, for example. But the numbers strongly suggest that that is exactly what has happened. The central banks’ gold is likely gone, and the bullion banks that sold it have no realistic chance of getting it back.

Notes:
ECB Data as of July 2012. Bank of Japan data as of March 31, 2012.

* European Central Bank reserves is composed of reserves held by the ECB, Belgium, Germany, Estonia, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, The Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.
** Bank of Japan only lists its gold reserves in Yen at book value.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.

Notwithstanding the recent conversions of PIMCO’s Bill Gross, Bridgewater’s Ray Dalio and Ned Davis Research to gold, we realize that many mainstream institutional investors still continue to struggle with the topic. We also realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system. As a general rule of common sense, when one embarks on an unlimited quantitative easing program targeted at the employment rate (see QE3), one had better make sure to have something in the vault as backup in case the ‘unlimited’ part actually ends up really meaning unlimited. We hope that it does not, for the sake of our monetary system, but given our analysis of the physical gold market, we’ll stick with our gold bars and take comfort as they collect more dust in our vaults, untouched.

and....

Tuesday, October 1, 2013

Gold and silver updates - October 1 -2 , 2013 ...... With Regulators away for the Shutdown , manipulators have a field day with shorting gold and silver ! By the way , check the link and note how much in total reserves has disappeared from the US , France , Germany , Greece , Italy et al ( from 2011 to 2012.) And then ask again , how much gold do these countries really have ?

Fellow Canadian Bryant Blake (who goes by the handle Rhody) has discovered something huge with respect to accounting for gold by the World Bank. The world bank has hinted in the past that it wished to discount leased gold. Its looks to me that they followed through on their promise. I will send this to Reg Howe is the authority on these matters and I will report back on his findings.

from Bryant Blake

"please feel free to bring in any of your associates to investigate the drop in reserves for the U.S, Germany, and France that is shown on the World Bank reserve table http://data.worldbank.org/indicator/FI.RES.TOTL.CD. You might want to post the world bank link table on LeMet in case the world bank removes it from the public domain. Below is a table which converts the drops in reserves to drops in gold holdings. Based on the numbers, all of the U.S. and German gold, and most of the French gold is gone if it is assumed that SDR and currency reserves stayed the same from 2011 to 2012. Even if the SDR and currency reserves for these countries dropped to zero, the 2012 reserves indicate gold holdings dropped about 70%. -Bryant

Change in Sovereign Reserves

Country

United States

Germany

France

2011 Gold Price

$1531/oz

$1531/oz

$1531/oz

2011 Total Reserves($Mil)

530,267

234,104

168,490

2011 Gold equivalent of reserves (mil oz)

350.92

152.91

110.05

2011 Gold equivalent of reserves (Tonnes)

10,915

4,756

3,423

Official Gold Reserves 9/13 (Tonnes)

8,134

3,391

2,435

% Gold value of total reserves

74.5%

71.3%

71.1%

% Gold value of total reserves WGC 9/13

71.6%

68.6%

66.8%

2012 Gold Price

$1657/oz

$1657/oz

$1657/oz

2012 Total Reserves($Mil)

139,138

67,422

54,230

2012 Gold equivalent of reserves (mil oz)

83.97

40.69

32.73

2012 Gold equivalent of reserves (Tonnes)

2,612

1,266

1,018

Drop in Gold Reserve (mil oz)

266.95

112.22

77.32

Drop in Gold Reserve (Tonnes)

8,303

3,490

2,405

Remaining Gold (Tonnes)

0

0

30

Total Gold Reduction (Tonnes) = 13,930

Total Gold Reduction (Mil Oz) = 447.86

***More from Bryant...

http://www.usmint.gov/about_the_mint/?action=annual_report The 2012 us mint report on page 42 reports deep storage gold with a market value of $435 billion on 9/30/12. This compares with end of 2012 us reserve per world bank of $139.1 billion. I remember some talk of the world bank discounting leased gold a few years ago. If they have implemented this it appears the us has leased all of its gold and has none which is unencumbered.

¤ YESTERDAY IN GOLD & SILVER

It was pretty quiet in gold in Far East trading on their Friday, as it rose and fell about five bucks between the Tokyo open and up until 30 minutes after the London open. At that point, the gold price took off to the upside, only to be met with a firestorm of selling by the sellers of last resort.

JPMorgan et al managed to put the fire out by shortly after 11 a.m. GMT in London---and from there the price traded quietly lower until around 10:30 a.m. EST in New York. After that it didn't do a lot, although a tiny rally that began around 12:30 p.m. EDT got sold down at 3:30 p.m. before it could get anywhere.

The CME Group recorded the high and lows ticks as $1,328.00 and $1,343.00 in the April contract.

The gold price finished the week at $1,334.70 spot, up $6.20 from Thursday's close. Net volume was very quiet at 87,000 contracts, with at least 50% of that used to kill the morning rally in London.

Here's the New York trading session up close and personal---and you can see the not-for-profit selling show up at 3:30 p.m. in electronic trading.

It was more or less the same price pattern in silver, so I'll spare you the play-by-play.

The high and low price ticks were recorded at $20.585 and $20.265 in the May contract.

Silver closed in New York at $20.275 spot, up a whole half a penny. Volume, net of March and April, was pretty low at 28,000 contracts but, like gold, it's a good bet that almost half of that volume was JPMorgan et al throwing Comex paper at the price during the rally in early trading in London.

The platinum chart was a mini version of the gold and silver charts---and the metal managed to close up a few dollars. Here's the chart.

Not surprisingly---and for the second day in a row---there was a decent rally in palladium, as news about the two new palladium ETFs in South Africa hit the Internet. The rally began just before 10 a.m. GMT in London---and just as obviously got capped less than an hour later. Then shortly after 9 a.m. in New York, the price went vertical---and a seller of last resort [probably JPMorgan] showed up and prevented the price from taking out the $800 spot level, which it would have certainly done if left to its own devices.

As it turned out, the high tick in palladium was 800.00 right on the button---and the low tick was $768.20---in the June contract, which is the current front month.

You pretty much have to have to have been born stupid, willfully blind, or be a bought and paid for whore of the World Gold Council and/or Silver Institute, not to see that JPMorgan et al prevented an upside explosion in the precious metals yesterday. If Russia really wanted to screw the U.S. over real good, all they would have to do is put an end to this price management scheme in all four precious metals, as they've known about it for at least a decade now---and China has, as well.

If these two countries wanted to be heroes to all the poor resource-producing countries of Africa, South America and elsewhere, they could change these country's fortunes virtually overnight---if Russia and China thought it in their own respective best interests to do so.

The dollar index closed on Thursday afternoon in New York at 80.19---and then spent all of Friday quietly chopping lower in a very tight range. The index close yesterday at 80.12, which was down 7 basis points on the day.

****

The CME's Daily Delivery Report drew a blank yesterday, as no gold or silver contracts were posted for delivery on Tuesday within the Comex-approved depositories. There was activity, but it was all in palladium.

Much to my surprise, an authorized participant added 134,905 troy ounces of gold to GLD yesterday. I'm only speculating here, but based on the price action all week, I'd guess that this deposit was being used to cover an existing short position. And as of 10:10 p.m. EDT yesterday evening, there were no reported changes in SLV.

The good folks over at Switzerland's Zürcher Kantonalbank updated their gold and silver ETFs for the week ending Friday, March 14. Their gold ETF continues to slide. During this reporting week, it declined by another 29,224 troy ounces. But their silver ETF showed an increase of 123,009 troy ounces.

The U.S. Mint had a sales report yesterday. They sold 3,500 troy ounces of gold eagles---1,000 one-ounce 24K gold buffaloes---and 140,500 silver eagles. They also sold 300 one-ounce platinum eagles sometime during the reporting week as well.

Month-to-date the mint has sold 16,500 troy ounces of gold eagles---10,000 one-ounce 24K gold buffaloes---9,000 one-ounce platinum eagles---and 3,283,500 silver eagles. Based on these numbers, the silver/gold sales ratio for the month so far stands at 124 to 1---and it's about 200 to 1 if you just compare silver eagles sales to gold eagles sales. These are incredible sales ratios.

There was a fairly large gold deposit---160,750 troy ounces---over at the Comex-approved warehouses on Thursday, all of which went into JPMorgan's depository. Nothing was shipped out. The link to that activity is here.

In silver, nothing was reported received, but 302,242 troy ounces were shipped out of four of the six depositories---and the link to that action is here.

The Commitment of Traders Report was a mixed bag. Silver was way better than I expected, but gold was terrible---and I'll leave the discussion about copper up to Ted Butler in his commentary to paying subscribers later today.

In silver, the Commercial net short position actually improved by 1,734 contracts, or 8.67 million ounces. The Commercial net short position now sits at 179.5 million ounces. That's the 'good' news.

The bad news is that of the 2,700 short contracts put on/bought by the Big 8 short holders, Ted figures that 2,000 of those contracts were done by JPMorgan. This brings their short-side corner in the Comex silver market up to around 20,000 contracts, or 100 million troy ounces. As I mentioned in the previous paragraph, the Commercial net short position in silver was 179.5 million ounces, so this means that JPMorgan holds about 55% of the Commercial net short position all by itself---and about 33% of the short position held by the eight largest traders on the short side combined. This is a short-side corner by definition.

As an aside in silver, the raptors---the Commercial traders other than the Big 8---bought 4,400 long contracts during the reporting week.

Gold was ugly. The Commercial net short position blew out by 20,567 contracts, or 2.06 million troy ounces. The Big 8 increased their short position by about 8,500 contracts---and the raptors [the Commercial traders other than the Big 8] went short about 8,000 contracts---and Ted Butler said that JPMorgan sold between 7-8,000 of their long-side corner, which is now down to somewhere between 39 and 40,000 contracts, or 3.9 to 4.0 million ounces of the stuff.

All of this was done in gold [and silver] by JPMorgan et al in order to prevent prices from blowing sky high during the reporting week, just like these same precious metals attempted to do again yesterday. As you already know, "da boyz" are the not-for-profit sellers---and the sellers of last resort. If they weren't there 24/7, then precious metal prices would be just outside the orbit of Pluto by now.

Here's a chart from Nick Laird that I haven't posted for many a moon. It's the "Days of World Production to Cover Comex Short Positions". It still looks much the same as it has for the last couple of years. Silver, except for a few weeks, has always occupied the far right position on this chart, with palladium and platinum not that far behind.

To give you some idea of JPMorgan's short position in silver compared to the total short positions of the Big 4 or Big 8 shorts---their 100 million ounce short-side corner in Comex silver translates into roughly 50 days of world silver production. The numbers on this chart are a graphic representation of the short positions of the 4 and 8 largest traders in all physical commodities on the Comex---and the data for this chart came straight out of yesterday's COT Report.

Chinese defaults and acute financial fragility weren’t issues a year ago. Confidence in Chinese finance and economic fundamentals was much stronger. Geopolitical risks were much lower. And, importantly, the market was clear on China’s policy of steady currency appreciation versus the dollar. This year’s “April/May/June Dynamic” could easily incorporate a major Chinese component. Chinese reserve holdings declined only slightly last May and June, before “hot money” flows returned with a vengeance by late summer. The prospect of China selling Treasuries was not a market concern.

Everything is just so much bigger than before: The Fed’s balance sheet; PBOC international reserves and the Chinese Credit system; the leveraged speculating community; the big “macro” hedge funds; the powerful “quant” funds; the sovereign wealth funds; the ETF complex; the big mutual fund companies. As history has shown, epic financial Bubbles by their nature spur a concentration of financial power. I often ponder how a marketplace dominated by big players tends to function differently than traditional decentralized marketplaces. Then I contemplate how such a “centralized” marketplace operates with assurances of ongoing central bank support. In my mind – and I see evidence for as much in the marketplace – the markets become more of a game, more speculative and increasingly detached from fundamental prospects.

And all of this really begs the question: to what degree can the Federal Reserve’s balance sheet be counted on as the markets’ future liquidity backstop? Actually, whether the Fed builds its holdings (“prints money”) or not is of seemingly little concern to the markets - that is so long as the markets remain buoyant (as they’ve been). Yet an eruption of de-risking/de-leveraging would have this backstop issue quickly elevated to the top of market worries. Moreover, this liquidity issue would be significantly compounded if the change in China’s currency policy incites a reversal of “hot money” flows and, perhaps, a resulting turnabout in China’s international reserve holdings.

It started the year around $1,200/oz and recently nearly got to $1,400/oz before slipping back a bit.

In a new note, Goldman argues that the rise in gold has been driven by three unsustainable factors: Weather-induced economic slowdown in the U.S., a spike in Chinese demand due to credit concerns, and increased geopolitical tension.

The firm argues that all of these tailwinds will fade and that gold will hit $1,050 this year.

China's gold demand as measured by withdrawals from the Shanghai Gold Exchange is up 29 percent so far this year as compared to last year, China gold market researcher and GATA consultant Koos Jansen reports yesterday. I

India’s export of gold jewellery rose 1.04 per cent in February, rising for the first time in fiscal 2013-14.

According to figures from the Gem & Jewellery Export Promotion Council (GJEPC), cumulative gold jewellery exports from April 2013 to February 2014 fell 45.6 per cent to $6.352 billion.

Exports of gold jewellery have taken a beating in 2013-14 with the government imposing restrictions on the import of gold in a bid to control the current account deficit (CAD) resulting in very limited gold supplies. The measures included higher import duty of 10 per cent on gold and an 80:20 scheme which made it mandatory for gold importers to export a fifth of the gold imported.

Speaking to The Hindu, Pankaj Parekh, Vice-Chairman, GJEPC, said “The blame for poor availability in the market would have to be on the Customs Department. There have been inordinate delays in releasing consignments of imported gold”.

On March 19, two gold bars were brought to Ilsan in Gyeonggi Province and deposited in the safe of the Korea Securities Depository (KSD), an organization that stores gold for the gold market. In order for the gold market to open, there needs to be actual gold to be bought and sold, and this was the first gold bullion to arrive at the safe.

The gold bars, which have a purity of 99.99%, weighed 1kg each, and a security label was attached to the bottom bearing the mark of the Korean Mint.

The KSD announced that, once the gold commodities market takes off, it is expecting to handle an average of 4-7 tons, or 4000-7000 gold bars, each day.

The West is not just confronting Russia, but potentially China and the other SCO members as well. Russia's relationship with the SCO brings with it the possibility of using gold as a weapon against the West, because most governments involved with the SCO have been actively buying gold while western central banks have been providing it. So far the SCO members have been content to accumulate the west's gold on falling prices, being careful not to disrupt the market.

We cannot say the Ukrainian crisis is over. It is more than likely Putin will not be fully satisfied until there is a Russian-friendly government in Kiev. And if a senior Russian politician cares to have another conversation with China over maximising turmoil on Wall Street, driving up the gold price is the obvious financial weapon of choice.

I’ve had some recent conversations with attorneys who were considering class-action lawsuits regarding a gold price manipulation stemming from reports about the London Gold Fix. I told them that while there is no doubt that gold and, particularly, silver are manipulated in price, I didn’t see how the manipulation stemmed from the London Fix. I wished them well and hoped that they may prevail (the enemy of my enemy is my friend), because you never know – if the lawyers dig deep enough they might find the real source of the gold and silver manipulation, namely, the COMEX (owned by the CME Group) and JPMorgan.

So I thought it might be constructive to lay out what I thought a successful lawsuit might look like, although I’m speaking as a precious metals analyst and not as a lawyer. I’ll try to put the whole thing into proper perspective, including the premise and scope of the manipulation as well as the parties involved.

The first thing I should mention is how unprecedented it is that I’m writing this in the first place. Here I am, directly and consistently accusing two of the world’s most important financial institutions of market manipulation (making sure I send each all my accusations) and I have received no complaint from either. I don’t think that has ever occurred previously. Now I am taking it one step further; presenting a guide for how and why JPMorgan and the CME should be sued for their manipulation of gold and silver (and copper, too).

Ted's been at this for almost 30 years, so he knows a thing or two about what might be the best way to end the price management scheme in the precious metals. You have to ask yourself why private individuals are the ones that have to storm the ramparts when the World Gold Council and The Silver Institute should be doing it on our [and the miners] behalf. But as I've said countless times in this column, the sole reason that these two organizations exist, is to ensure that this very thing never happens---and that the mining companies are kept in line.

***

¤ THE WRAP

You pretty much have to have to have been born stupid, willfully blind, or be a bought and paid for whore of the World Gold Council and/or Silver Institute, not to see that JPMorgan et al prevented an upside explosion in the precious metals yesterday. If Russia really wanted to screw the U.S. over real good, all they would have to do is put an end to this price management scheme in all four precious metals, as they've known about it for at least a decade now---and China has, as well.

If these two countries wanted to be heroes to all the poor resource-producing countries of Africa, South America and elsewhere, they could change these country's fortunes virtually overnight---if Russia and China thought it in their own respective best interests to do so. - Ed Steer: Gold and Silver Daily---21 March 2014

Today's pop "blast from the past" is only 15 years old---and one of the few modern pop songs that I think is worth listening to. Carlos Santana and Rob Thomas do the honours---and the link is here.

Today's classical "blast from the past" is another Jean Sibelius number, but it's totally different from the one that I posted in this space last week. The Swan of Tuonela is an 1895 tone poem---and is the second part of Op. 22 Lemminkäinen(Four legends), tales from the Kalevala epic of Finnish mythology. It's a melancholy piece---and the solo by the cor anglais is perhaps the best known for this instrument in all of orchestral literature. The link is here.

Well, I'll be the first one to admit that yesterday's price rally shortly after the London open came as a big surprise to me. What wasn't a surprise---and a disappointment---was the immediate explosion in open interest as JPMorgan et al, as sellers of last resort, were there to kill the rallies stone cold dead. Of course they had to give a little ground in palladium because of the announcement of the two new South African palladium funds, but even then, their footprints at the $800 mark were obvious for anyone who cared to examine the price chart carefully.

As I said in The Wrap in yesterday's column, it didn't appear that "da boyz" were about to give up control of the precious metal market any time soon---and this turned out to be prophetic within hours of me writing it.

Where we go from here is anyone's guess. The roll-overs out of the April delivery month in gold have to be all done by next Friday---and I'm sure that JPMorgan would still dearly love to take out both the 50 and 200-day moving averages in that precious metal before then, but yesterday's price action sort of threw a spanner into the works.

And as I mentioned in the first part of today's column, the dichotomy between the gold and silver equities is still something I'm keeping an eye on---and Friday's numbers only reconfirmed my suspicion that someone with very deep pockets is taking a very large position in silver equities using the engineered price decline as cover.

Taking a look at the preliminary volume report from the CME yesterday, I note that there are only about 35 gold contracts and just under 200 silver contracts still open in the March delivery month---and those have to delivered into, or rolled over, by next Friday as well.

I'm only speculating here, but it appears that it may be anything but "business as usual" next week---and for that reason I'll be watching the 6 p.m. EDT open in New York on Sunday evening with more interest than normal.

Total accumulative withdrawals of gold from the Dealers inventory this month

1399.97 oz

Total accumulative withdrawal of gold from the Customer inventory this month

128,127.25 oz

***

And now the Gold inventory at the GLD:March 21.2014: tonnage 816.97 (a huge increase of 4.19 tonnes of gold/great news as China still brings in close to 6 tonnes of physical gold into Shanghai each day. The Bank of England must be worried!!)

***

Gold Completes Golden Cross

For the first time in 13 months, gold's 50-day moving-average is above its 200-day moving-average. This so-called "golden cross" occurred in Feb 09 before gold surged over 100% in the following years (but also occurred 'falsely' in September 2012.

Some technicians are reflcting on the last big run that gold had...

***

Ted Butler on what will be the biggest class action lawsuit in history:

(courtesy Ted Butler)

Suing JPMorgan and the COMEX

|

March 21, 2014 - 10:05am

I’ve had some recent conversations with attorneys who were considering class-action lawsuits regarding a gold price manipulation stemming from reports about the London Gold Fix. I told them that while there is no doubt that gold and, particularly, silver are manipulated in price, I didn’t see how the manipulation stemmed from the London Fix. I wished them well and hoped that they may prevail (the enemy of my enemy is my friend), because you never know – if the lawyers dig deep enough they might find the real source of the gold and silver manipulation, namely, the COMEX (owned by the CME Group) and JPMorgan.

So I thought it might be constructive to lay out what I thought a successful lawsuit might look like, although I’m speaking as a precious metals analyst and not as a lawyer. I’ll try to put the whole thing into proper perspective, including the premise and scope of the manipulation as well as the parties involved.

The first thing I should mention is how unprecedented it is that I’m writing this in the first place. Here I am, directly and consistently accusing two of the world’s most important financial institutions of market manipulation (making sure I send each all my accusations) and I have received no complaint from either. I don’t think that has ever occurred previously. Now I am taking it one step further; presenting a guide for how and why JPMorgan and the CME should be sued for their manipulation of gold and silver (and copper, too).

Let me explain why I am doing this. I am still certain that the coming physical silver shortage will end the price manipulation, but I see nothing wrong with trying to hasten that day. Over the past quarter century, I petitioned the regulators incessantly to end the manipulation, but the CFTC refused to do so. Far from regretting my past efforts, I feel it has greatly advanced and legitimized the allegations of manipulation. After 25 years, however, one must recognize that the horse being beaten is dead and that the CFTC will never act.

So, instead of simply waiting for the silver shortage to end the manipulation, I thought it advisable to try a new approach that was completely compatible with the real silver story to date. Since I (we) couldn’t get the CFTC to do its job and end the manipulation; why not try a different approach? The truth is that I have long believed that the right civil lawsuit stood a good chance at ending the manipulation before a silver shortage hit. I had high hopes initially that the class-action suit that was filed against JPMorgan for manipulating the price of silver a few years ago might succeed; but it seemed to drift off track and I wasn’t particularly surprised that it was ultimately dismissed. My intent should be clear – I want to see the next lawsuit succeed.

The stakes in a COMEX silver/gold/copper manipulation lawsuit are staggering. Not only is market manipulation the most serious market crime possible, the markets that have been manipulated and the number of those injured are enormous. I don’t think it’s an exaggeration to say that any finding that JPMorgan and the COMEX did manipulate prices as I contend could very well result in the highest damage awards in history. That’s no small thing considering the tens of billions of dollars that JPMorgan has coughed up recently for infractions in just about every line of their business.

My point is that no legal case could be potentially more lucrative or attention getting than this one. Certainly, this also includes the pitfall that JPMorgan and the CME are legal powerhouses who are not likely to roll over easily. Because the silver manipulation has lasted so long and damaged so many, the stakes away from any monetary finding are staggering. It is no real stretch to suggest, with or without eventual criminal findings, the reputational and regulatory repercussions (from other countries) could threaten the existence of each institution in current form (or at least management).

What is the theory or premise of the legal case for market manipulation against JPMorgan and the CME? The COMEX has evolved into a trading structure that has allowed speculators to control and dictate the price of world commodities, like gold, silver and copper, with no input from the world’s real producers, consumers and investors in these metals. The CME has allowed and encouraged this development for the sole purpose of increasing trading fee income. Not only do the world’s real metal producers, consumers and investors have no effective input into the price discovery process on the COMEX; because the COMEX is the leading metals price setter in the world, real producers, consumers and investors are forced to accept prices that are dictated to them by speculators on the exchange.

Because so few of the world’s real producers, consumers and investors deal on the COMEX, the exchange has developed into a “bucket shop” or a private betting parlor exclusively comprised of speculators. Again, this is an intentional development as much more trading volume is generated by speculative High Frequency Trading (HFT) than by legitimate hedgers (like miners) transferring risk to speculators. Legitimate hedgers don’t day trade. It is no exaggeration to say that the COMEX has been captured by speculators and abandoned by legitimate hedgers.

In turn, JPMorgan has developed into the “King Rat” in the speculative bucket shop by virtue of its consistent market corners in COMEX gold, silver and copper futures. The COMEX market structure was already rotten when JPMorgan blasted onto the scene in March 2008 when the bank acquired Bear Stearns’ short market corners in gold and silver. Incredibly, the regulators engineered the Bear Stearns rescue, granting to JPMorgan a listed market control in addition to the OTC market share control that JPM held for years. Talk about a powerful manipulative combo – JPMorgan and the COMEX.

Perhaps the most compelling aspect of my premise for a legal case against the CME and JPMorgan for market manipulation is that it is based exclusively on public data available from the CFTC in the form of the agency’s weekly Commitments of Traders (COT) and monthly Bank Participation Reports. There is additional proof of JPM’s controlling market share in the Treasury Department’s OCC OTC Derivatives Report (please see my public comment to the Federal Reserve at the end of this piece). The CFTC data may seem somewhat complex at first, but there can be little question as to its general accuracy and government pedigree. In fact, the data is compiled from exchange information transmitted to the CFTC, so the CME can’t deny its accuracy. There’s no he said/she said or ambiguity in these data series. In short, it is type of data that will hold up in a court of law.

According to the CFTC’s data, there are two primary groups of speculators setting prices on the COMEX. One group are the technical funds, traders that buy and sell strictly on price movement. Also referred to as trend followers and momentum traders, the technical funds buy and continue to buy futures contracts as prices climb; and sell and continue to sell, including short sales, as prices fall until prices subsequently reverse. These traders are included in the Managed Money category of the disaggregated version of the COT report, primarily because they are investment funds trading on behalf of outside investors, also known as registered Commodity Trading Advisors (CTA’s).

One thing that can be said for certain about these technical funds is that they are pure speculators, as there is no mining company or user of metal in this category by CFTC and CME definition. By itself, there is nothing wrong with that as regulated futures exchanges need speculators to take the other side of the transaction when legitimate hedgers wish to lay off price risk in the normal course of their underlying business. This is the economic justification for why congress had authorized futures trading originally. The problem is that there are few, if any, legitimate hedgers involved on the COMEX nowadays; only other speculators that are falsely categorized as legitimate producers and consumers.

The second group of speculators are primarily categorized as commercials, mostly in the Producer/Merchant/Processor/User category, but also in the Swap Dealers category. Since these terms are quite specific and strongly suggest that only legitimate hedgers are included, most people automatically assume the traders in these commercial categories are just that – hedgers. But that is not the case, as most of the traders in these two categories are banks, led by JPMorgan, pretending to be hedging, but which are, in reality, trading on a proprietary basis strictly for profit. Simply put, JPMorgan and other collusive COMEX traders are just pretending to be commercially engaged in COMEX trading in gold, silver and copper when, in reality, they are nothing more than hedge funds in drag. - Link.

The lynchpin of any legal case against JPMorgan and the CME revolves around whether the traders in the commercial categories of the COT report are, in fact, hedging or simply speculating, as are the technical funds. The CME and JPMorgan will go to the ends of the earth to show that the commercials are hedging, not speculating and will hide behind the twin concepts that the commercials are either trading on behalf of clients or are actively involved in market making and are thereby providing much needed liquidity. It will sound legitimate if you believe in make believe stories instead of facts.

JPMorgan has a history of proclaiming it is hedging when confronted with an unnecessarily large speculative position. The first thing the bank declared when the London Whale debacle surfaced was that it was part of a hedge against the bank’s portfolio. But that was openly scoffed at and quickly discarded as an excuse. JPM is likely to trot out the hedging or market making justification, but any competent attorney will blow that away. No one (openly or legitimately) granted JPMorgan the right to maintain market corners in COMEX gold and silver.

In December 2012, JPMorgan held market shares on the short side of COMEX gold and silver that amounted to 20% and 35% of the net open interest in each market respectively. It is not possible that a reasonable person would not consider those market shares in an active regulated futures market to constitute market corners. After rigging prices lower by historical amounts in 2013, JPMorgan flipped its short market corner in COMEX gold to a long market corner of as much as 25% and reduced its short market corner in COMEX silver to under 15% from 35%, pocketing more than $3 billion in illicit profits. I’d like to see JPMorgan explain some connection to hedging with regards to its position change.

Undoubtedly, JPMorgan will claim it was “making markets” to explain away its huge position shifts in COMEX gold and silver (and copper), proclaiming it was always a buyer on the downside and a seller on the upside of prices. True enough, but far from being the market hero it will pretend to be, a closer examination will reveal something else entirely. The purpose of market making is to provide market liquidity and price stability. Legitimate traders are given some leeway from regulations limiting speculative positions and market shares from growing too large in order to enhance liquidity and price stability which benefits everyone.

But the record clearly indicates that JPMorgan, in cahoots with the CME, has used its dominant market shares in COMEX gold, silver and copper to instead engage in an evil form of market making whose intent is to constrict liquidity and create disorderly pricing. What record indicates that? The price record. Twice in 2011, the price of silver fell more than 30% ($15) in a matter of days and last year gold fell $200 and silver by $5 in two days. These price declines were unprecedented, had no legitimate supply/demand explanation and the regulators, including the CME did or said anything.

For sure, JPMorgan was a buyer on those deliberate price smashes and every other COMEX gold, silver and copper price smash for the past six years, but how does that make them a hero? This crooked bank and the CME and others arranged every COMEX price smash in order to create chaos, drain liquidity and disrupt pricing; the exact opposite of what legitimate market making is supposed to be. JPMorgan and the CME violated public trust in our markets as proven by the price record. For that, they should be made to pay dearly.

The key question is how did (and does) JPMorgan and the CME pull this off repeatedly? It all has to do with market mechanics, of which JPM and the CME are absolute masters. Since there are, essentially, two separate and competing speculative groups setting prices on the COMEX, it comes down one group scamming the other. (I know this is old hat to subscribers, but please remember I’m writing this to convince the right attorney to take on these crooks). So how does JPM get positioned to profit from a price smash (or price rise) and then rig prices to go in their direction? Basically, by scamming the technical funds by getting those funds to do what is profitable for JPMorgan and other collusive commercial traders and including the CME in the form of extraordinarily large trading volume.

How the heck does JPMorgan and the CME pull that off? They can pull it off because they know how the technical funds operate and because JPM and the CME also know how to cause the funds to buy and sell when JPM wants them to buy and sell. Since the technical funds only buy as prices are rising and only sell as prices are falling, particularly when prices penetrate key moving averages, all JPMorgan and the other collusive commercials have to do is occasionally set prices above and below those key moving averages. And thanks to an array of dirty trading tricks developed over the past 30 years, the most recent being HFT, JPMorgan can set short term prices wherever it chooses, whenever it desires.

In a very real sense, JPMorgan and other collusive COMEX commercials have become the puppet masters controlling the technical funds’ movements. It is an exquisite racket – JPMorgan gets the technical funds to buy or sell in order to take the other side of the transaction as counterparties. This can be seen in almost every price move in COMEX gold, silver and copper over the years. Let me try to present the data in graphic form, courtesy of some charts by my Aussie friend, Nick Laird of sharelynx.com.

Depicted below are the three main metals of the COMEX, gold, silver and copper and the net positions of the traders in the managed money category – the technical funds over the past couple of years. If you plot when the technical funds buy or sell, there is almost a 100% correlation to price. In other words, when the technical funds buy, prices for gold, silver and copper rise and when the technical funds sell, prices fall. The correlation is almost uncanny, to the point where some pundits have recently claimed that it is the technical funds, not the commercials, which are manipulating prices. But those claims melt away once one considers the nature of this bucket shop fraud.

Sure, the technical funds move prices when they buy and sell, but that’s just what JPMorgan and the CME count on. If the technical funds weren’t mechanical and predictable there would be no scam possible. It is only because the technical funds can be counted on to do the same thing repetitively that allows JPMorgan and other collusive commercials to take counterparty positions. If the technical funds weren’t predictable, JPMorgan would never have made $3 billion+ last year in COMEX gold and silver and been able to flip a short market corner in COMEX gold to a long market corner. Or just ask yourself – why would the technical funds collude to harm themselves?

I also feel it is significant that I can now include copper in the JPMorgan/CME illicit scheme to manipulate. This broadens the manipulation in a systemically important way. If ever there was a case for the Racketeer Influenced and Corrupt Organizations Act (RICO), this must be it.

In one recent attorney conversation,I was asked to provide the name of a technical fund that was duped as I described and would like to seek legal redress. If I could have, I would have, but I don’t think that’s possible. It’s another reason I refer to this COMEX manipulation as almost the perfect crime. In this case, any technical fund would not likely seek redress as a victim (certainly not as the initiator of legal action) because to do so would involve having to admit being the mark at a crooked poker game, something not conducive to attracting additional investor funds. In fact, it would invalidate a technical fund’s core business and be tantamount to simply quitting a business that may have been in existence for decades. It just isn’t going to happen.

But that hardly matters because the nature of market manipulation means there are untold numbers of other victims, particularly considering the scope of the gold, silver and copper markets. Whereas the technical funds were both the enablers and sometimes victims of the scam I described above, there are many thousands of legitimate victims (including me and many of you) who did nothing to enable the scam.

I dare say that there are more potential victims of the JPMorgan/COMEX gold, silver and copper manipulations than in just about any previous financial fraud. Let’s face it, there is hardly a mining company or investor in gold and silver or mining company shares that hasn’t been damaged over the past six years to some extent. That’s when JPMorgan came to dominate COMEX trading. If a legitimate class-action lawsuit was initiated, I believe potential litigants would emerge in massive numbers. Then again, there’s only one way to find out for sure and that’s to have such a case filed.

On a number of occasions in the past, when there was still some slim hope that the CFTC might address the ongoing silver manipulation, I publicly requested that you should submit public comments on issues related to position limits. By my count, upwards of 10,000 comments were submitted collectively, for which I offered my profuse thanks. Unfortunately, because the agency appeared to be compromised on the issue, no real good came from it through no fault of our own. Therefore, I would hardly ask anyone to do that again.

But I was reminded by a subscriber that I should submit a comment in regard to the Federal Reserve’s open public comment period seeking input on whether banks should be allowed to deal in physical commodities and derivatives on such commodities. I had mentioned in a previous article that I was undecided whether to do so or not. The subscriber convinced me that it was the right thing to do in order to go on the record, to which I had to agree (thanks, Jim). I understand the comment period has been extended to April 14, for anyone wishing to submit comments for the record. There have been less than 80 comments posted thru today and mine are near the bottomhttp://www.federalreserve.gov/apps/foia/ViewAllComments.aspx?doc_id=R-1479&doc_ver=1

Ted Butler

March 19, 2014

And.....

Gold could be Russia's big weapon in financial war

8:04a HKT Saturday, March 22, 2014

Dear Friend of GATA and Gold:

Russia and China have realized the enormous leverage they have over Western economies, GoldMoney research director Alasdair Macleod writes today, adding that "driving up the gold price is the obvious financial weapon of choice":

In an interview with Lauren Lyster of Yahoo Finance's "Daily Ticker" program, fund manager, geopolitical analyst, and author James G. Rickards elaborates on the alternative gold presents to the U.S. dollar for Russia and China:

China’s Gold Policy – One Of The World’s Most Important Developments

Lars Schall talked with Koos Jansen about different aspects regarding the Chinese gold policy. In general, Jansen sees the development as an expression of the shift of power from the West towards the East. In his estimation, Chinese authorities have by now between 3.000 – 4.000 tons of gold in their vaults in order to support the internationalization of the Yuan.

By Lars Schall

The following interview was conducted for and originally published by GoldSwitzerland in Zurich, Switzerland here.

China’s Gold Policy – One Of The World’s Most Important Developments

Koos Jansen, born 1981, worked as a sound engineer in Amsterdam, before he became disabled in 2013. During that year, he started his financial blog “In Gold We Trust,” at which he writes in particular about the Chinese gold market. Jansen lives in Amsterdam.

How China Imported A Record $70 Billion In Physical Gold Without Sending The Price Of Gold Soaring

A little over a month ago, we reportedthat following a year of record-shattering imports, China finally surpassed India as the world's largest importer of physical gold. This was hardly a surprise to anyone who has been following our coverage of the ravenous demand for gold out of China,starting in September 2011, and tracing it all the way to the present.

China's apetite for physical gold, which is further shown below focusing just on 2012 and 2013, has been estimated by Goldman to amount to over $70 billion in bilateral trade between just Hong Kong and China alone.

Yet while China's gold demand is acutely familiar one question that few have answered is just what is China doing with all this physical gold, aside fromfilling massive brand new gold vaults of course. And a far more important question: how does China's relentless buying of physical not send the price of gold into the stratosphere.

For the answer, we have to go back to our post from May of 2013 "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?", in which we explained how China uses commodity financing deals to mask the flow of "hot money", or the one force that has been pushing the Chinese Yuan ever higher, forcing the PBOC to not only expand the USDCNY trading band to 2% recently, but to send the currency tumbling in an attempt to reverse said hot money flows.

We emphasize the word "gold" in the previous sentence because it is what the rest of this article is about.

Let's step back for a minute for the benefit of those 99.9% of financial pundits not intimate with the highly complex concept of China Commodity Funding Deals (CCFDs), and start with a simple enough question, (and answer.)

Just what are CCFDs?

The simple answer: a highly elaborate, if necessarily so, way to bypass official channels (i.e., all those items which comprise China's current account calculation), and using "shadow" pathways, to arbitrage the rate differential between China and the US.

As Goldman explains, there are many ways to bring hot money into China. Commodity financing deals, overinvoicing exports, and the black market are the three main channels. While it is extremely hard to estimate the relative share of each channel in facilitating the hot money inflows, one can attempt to "ballpark" the total notional amount of low cost foreign capital that has been brought into China via commodity financing deals.

While commodity financing deals are very complicated, the general idea is that arbitrageurs borrow short-term FX loans from onshore banks in the form of LC (letter of credit) to import commodities and then re-export the warrants (a document issued by logistic companies which represent the ownership of the underlying asset) to bring in the low cost foreign capital (hot money) and then circulate the whole process several times per year. As a result, the total outstanding FX loans associated with these commodity financing deals is determined by:

the volume of physical inventories that is involved

commodity prices

the number of circulations

A "simple" schematic involving a copper CCFDs saw shown here nearly a year ago, and was summarized as follows.

As we reported previously citing Goldman data, the commodities that are involved in the financing deals include copper, iron ore, and to a lesser extent, nickel, zinc, aluminum, soybean, palm oil, rubber and, of course, gold. Below are the desired features of the underlying commodity:

China is heavily reliant on the seaborne market for the commodity

the commodity has relatively high value-to-density ratio so that the storage fee and transportation cost are relatively low

the commodity has a long shelf life, so that the underlying value of the commodity will not depreciate significantly during the financing deal period

the commodity has a very liquid paper market (future/forward/swap) in order to enable effective commodity price risk hedging.

Here we finally come to the topic of gold because gold is an obvious candidate for commodity financing deals, given it has a high value-to-density ratio, a well-developed paper market and very long "shelf life." Curiously iron ore is not as suitable, based on most of these metrics, and yet according to recent press reports seeking to justify the record inventories of iron ore at Chinese ports, it is precisely CCFDs that have sent physical demand for iron through the proverbial (warehouse) roof.

Gold, on the other hand, is far less discussed in the mainstream press in the context of CCFDs and yet it is precisely its role in facilitating hot money flows, perhaps far more so than copper and even iron ore combined, that is so critical for China, and explains the record amount of physical gold imports by China in the past three years.

Chinese gold financing deals are processed in a different way compared with copper financing deals, though both are aimed at facilitating low cost foreign capital inflow to China. Specifically, gold financing deals involve the physical import of gold and export of gold semi-fabricated products to bring the FX into China; as a result,China’s trade data does reflect, at least partially, the scale of China gold financing deals. In contrast, Chinese copper financing deals do not need to physically move the physical copper in and out of China as explained last yearso it is not shown in trade data published by China customs.

repeat step 1-3

This is shown in the chart below:

As shown above, gold financing deals should theoretically inflate China’s import and export numbers by roughly the same size. For imports, they inflate China’s total physical gold imports, but inflate exports that are mainly related to gold products, such as gold foils, plates and jewelry. Sure enough, the value of China’s imports of gold from Hong Kong has risen more than 10 fold since 2009 to roughly US$70bn by the end of 2013 while exports of gold and other products have increased by roughly the same amount (shown below). This is in line with the implication of the flow chart on Chinese gold financing deals: the deals inflate both imports and exports by roughly equal size.

Given this, that the rapid growth of the market size of gold trading between China and Hong Kong created from 2009 (less than US$5bn) to 2013 (roughly US$70bn) is most likely driven by gold financing deals.

However, a larger question remains unknown, namely that as Goldman observes, "we don’t know how many tons of physical gold are used in the deals since we don’t know the number of circulations, though we believe it is much higher than that for copper financing deals."

Step 1) offshore trader A sells warrant of bonded copper (copper in China’s bonded warehouse that is exempted from VAT payment before customs declaration) or inbound copper (i.e. copper on ship in transit to bonded) to onshore party B at price X (i.e. B imports copper from A), and A is paid USD LC, issued by onshore bank D. The LC issuance is a key step that SAFE’s new policies target.

Step 2) onshore entity B sells and re-exports the copper by sending the warrant documentation (not the physical copper which stays in bonded warehouse ‘offshore’) to the offshore subsidiary C (N.B. B owns C), and C pays B USD or CNH cash (CNH = offshore CNY). Using the cash from C, B gets bank D to convert the USD or CNH into onshore CNY, and trader B can then use CNY as it sees fit.

Step 3) Offshore subsidiary C sells the warrant back to A (again, no move in physical copper which stays in bonded warehouse ‘offshore’), and A pays C USD or CNH cash with a price of X minus $10-20/t, i.e. a discount to the price sold by A to B in Step 1.

Step 4) Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.

In other words, the only limit on the amount of leverage, aka rehypothecation of copper, was limited only by letter of credit logistics (i.e. corrupt bank back office administrator efficiency), as there was absolutely no regulatory oversight and limitation on how many times the underlying commodity can be recirculated in a CCFD.... And gold is orders of magnitude higher!

Despite the uncertainty surrounding the actual leverage and recirculation of the physical, Goldman has made the following estimation:

We estimate, albeit roughly, that there are c.US$81-160 bn worth of outstanding FX loans associated with commodity financing deals – with the share of each commodity shown in Exhibit 23. To put it into context, the commodity-related outstanding FX borrowings are roughly 31% of China’s short-term FX loans (duration less than 1 year) .

Putting the estimated role of gold in China's primary hot money influx pathway, at $60 billion notional, it is nearly three time greater than the well-known Copper Funding Deals, and higher than all other commodity funding deals combined!

Under what conditions would Chinese commodity financing deals take place. Goldman lists these as follows:

the China and ex-China interest rate differential (the primary source of revenue),

CNY future curve (CNY appreciation is a revenue, should the currency exposure be not hedged),

the cost of commodity storage (a cost),

the commodity market spread (the spread is the difference between the futures

China’s capital controls remain in place (otherwise CCFD would not be necessary).

All of these components are exogenous to the commodity market, except one – the commodity market spread. This reveals an important point that financing deals are, in general, NOT independent of commodity market fundamentals. If the commodity market moves into deficit, or if the financing demand for the commodity is greater than its finite supply of above ground inventory, the commodity market spread adjusts to disincentivize financing deals by making them unprofitable (thus making the physical inventory available to the market).

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That bolded, underlined sentence is a direct segue into the second part of this article, namely how is it possible that China imports a mindblowing 1400 tons of physical, amounting to roughly $70 billion in notional, demand which under normal conditions would send the equilibrium price soaring, and yet the price not only does not go up, but in fact drops.

The answer is simple: the gold paper market.

And here is, in Goldman's own words, is an explanation of the missing link between the physical and paper markets. To be sure, this linkage has been proposed and speculated repeatedly by most, especially those who have been stunned by the seemingly relentless demand for physical without accompanying surge in prices, speculating that someone is aggressively selling into the paper futures markets to offset demand for physical.

Now we know for a fact. To wit from Goldman:

From a commodity market perspective, financing deals create excess physical demand and tighten the physical markets, using part of the profits from the CNY/USD interest rate differential to pay to hold the physical commodity. While commodity financing deals are usually neutral in terms of their commodity positionowing to an offsetting commodity futures hedge, the impact of the purchasing of the physical commodity on the physical market is likely to be larger than the impact of the selling of the commodity futures on the futures market. This reflects the fact that physical inventory is much smaller than the open interest in the futures market. As well as placing upward pressure on the physical price, Chinese commodity financing deals ‘tighten’ the spread between the physical commodity price and the futures price .

Goldman concludes that "an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.

We agree that this may indeed be the case for "simple" commodities like copper and iron ore, however when it comes to gold, we disagree, for the simple reason that it was in 2013, the year when Chinese physical buying hit an all time record, be it for CCFD purposes as suggested here, or otherwise, the price of gold tumbled by some 30%! In other words, it is beyond a doubt that the year in which gold-backed funding deals rose to an all time high, gold tumbled. To be sure this was not due to the surge in demand for Chinese (and global) physical. If anything, it was due to the "hedged" gold selling by China in the "paper", futures market.

And here we see precisely the power of the paper market, where it is not only China which was selling specifically to keep the price of the physical gold it was buying with reckless abandon flat or declining, but also central and commercial bank manipulation, which from a "conspiracy theory" is now an admitted fact by the highest echelons of the statist regime. and not to mentionmarket regulators themselves.

Which answers question two: we now know that of all speculated entities who may have been selling paper gold (since one can and does create naked short positions out of thin air), it was likely none other than China which was most responsible for the tumble in price in gold in 2013 - a year in which it, and its billionaire citizens, also bought a record amount of physicalgold (much of its for personal use of course - just check out thoseoverflowing private gold vaults in Shanghai.

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This brings us to the speculative conclusion of this article: when we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for. This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.